Standard Costs and Operating Performance Measures: Solutions To Questions

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Chapter 11
Standard Costs and Operating Performance
Measures
Solutions to Questions
11-1 A quantity standard indicates how much
of an input should be used to make a unit of
output. A price standard indicates how much the
input should cost.
11-2 Ideal standards assume perfection and
do not allow for any inefficiency. Ideal standards
are rarely, if ever, attained. Practical standards
can be attained by employees working at a
reasonable, though efficient pace and allow for
normal breaks and work interruptions.
11-3 Under management by exception,
managers focus their attention on results that
deviate from expectations. It is assumed that
results that meet expectations do not require
investigation.
11-4 eparating an overall variance into a
price variance and a quantity variance provides
more information. !oreover, price and quantity
variances are usually the responsibilities of
different managers.
11-5 "he materials price variance is usually
the responsibility of the purchasing manager.
"he materials quantity and labor efficiency
variances are usually the responsibility of
production managers and supervisors.
11-6 "he materials price variance can be
computed either when materials are purchased
or when they are placed into production. It is
usually better to compute the variance when
materials are purchased because that is when
the purchasing manager, who has responsibility
for this variance, has completed his or her work.
In addition, recogni#ing the price variance when
materials are purchased allows the company to
carry its raw materials in the inventory accounts
at standard cost, which greatly simplifies
bookkeeping.
11- "his combination of variances may
indicate that inferior quality materials were
purchased at a discounted price, but the low$
quality materials created production problems.
11-! If standards are used to find who to
blame for problems, they can breed resentment
and undermine morale. tandards should not be
used to find someone to blame for problems.
11-" everal factors other than the
contractual rate paid to workers can cause a
labor rate variance. %or example, skilled workers
with high hourly rates of pay can be given duties
that require little skill and that call for low hourly
rates of pay, resulting in an unfavorable rate
variance. &r unskilled or untrained workers can
be assigned to tasks that should be filled by
more skilled workers with higher rates of pay,
resulting in a favorable rate variance.
Unfavorable rate variances can also arise from
overtime work at premium rates.
11-1# If poor quality materials create
production problems, a result could be
excessive labor time and therefore an
unfavorable labor efficiency variance. Poor
' "he !c(raw$)ill *ompanies, Inc., +,-,
., !anagerial Accounting, -.th /dition
quality materials would not ordinarily affect the
labor rate variance.
11-11 If overhead is applied on the basis of
direct labor$hours, then the variable overhead
efficiency variance and the direct labor efficiency
variance will always be favorable or unfavorable
together. 0oth variances are computed by
comparing the number of direct labor$hours
actually worked to the standard hours allowed.
"hat is, in each case the formula is1
/fficiency 2ariance 3 45A) 6 )7
&nly the 849 part of the formula, the standard
rate, differs between the two variances.
11-12 A statistical control chart is a graphical
aid that helps identify variances that should be
investigated. Upper and lower limits are set on
the control chart. Any variances falling between
those limits are considered to be normal. Any
variances falling outside of those limits are
considered abnormal and are investigated.
11-13 If labor is a fixed cost and standards are
tight, then the only way to generate favorable
labor efficiency variances is for every
workstation to produce at capacity. )owever, the
output of the entire system is limited by the
capacity of the bottleneck. If workstations before
the bottleneck in the production process produce
at capacity, the bottleneck will be unable to
process all of the work in process. In general, if
every workstation is attempting to produce at
capacity, then work in process inventory will
build up in front of the workstations with the least
capacity.
11-14 "he difference between delivery cycle
time and throughput time is the waiting period
between when an order is received and when
production on the order is started. "hroughput
time is made up of process time, inspection
time, move time, and queue time. "hese four
elements can be classified into value$added time
5process time7 and non$value$added time
5inspection time, move time, and queue time7.
11-15 An !*/ of less than - means that the
production process includes non$value$added
time. An !*/ of ,.:,, for example, means that
:,; of throughput time consists of actual
processing, and that the other <,; consists of
moving, inspection, and other non$value$added
activities.
' "he !c(raw$)ill *ompanies, Inc., +,-,
.- !anagerial Accounting, -.th /dition
$%ercise 11-1 5+, minutes7
-. *ost per -=$gallon container................................... >--=.,,
?ess +; cash discount........................................... +..,
@et cost................................................................... --+.A,
Add shipping cost per container 5>-., B -,,7........ -..,
"otal cost per -=$gallon container 5a7...................... >--:.,,
@umber of quarts per container
5-= gallons C : quarts per gallon7 5b7................... <,
tandard cost per quart purchased 5a7 B 5b7........... >-.D,
+. *ontent per bill of materials............................... A.< quarts
Add allowance for evaporation and spillage
5A.< quarts B ,.D= 3 E., quartsF
E., quarts 6 A.< quarts 3 ,.: quarts7.............. ,.: quarts
"otal................................................................... E., quarts
Add allowance for reGected units
5E., quarts B :, bottles7.................................. ,.+ quarts
tandard quantity per salable bottle of solvent. . E.+ quarts
..
Item
Standard
Quantity Standard Price
Standard Cost
per Bottle
/chol E.+ quarts >-.D, per quart >-=.=E
' "he !c(raw$)ill *ompanies, Inc., +,-,. All rights reserved.
olutions !anual, *hapter -- .+
-. @umber of helmets............................................... .=,,,,
tandard kilograms of plastic per helmet.............. C ,.<
"otal standard kilograms allowed......................... +-,,,,
tandard cost per kilogram................................... C 4!E
"otal standard cost............................................... 4!-<E,,,,
Actual cost incurred 5given7.................................. 4!-A-,,,,
"otal standard cost 5above7.................................. -<E,,,,
"otal material varianceHunfavorable................... 4! .,,,,
+. Actual Iuantity
of Input, at
Actual Price
Actual Iuantity of Input,
at tandard Price
tandard Iuantity
Allowed for &utput, at
tandard Price
5AI C AP7 5AI C P7 5I C P7
++,=,, kilograms C +-,,,, kilogramsJ C
4!E per kilogram 4!E per kilogram
4!-A-,,,, 3 4!-E,,,,, 3 4!-<E,,,,

Price 2ariance,
4!D,,,, %
Iuantity 2ariance,
4!-+,,,, U
"otal 2ariance,
4!.,,,, U
J.=,,,, helmets C ,.< kilograms per helmet 3 +-,,,, kilograms
Alternatively, the variances can be computed using the formulas1
!aterials price variance 3 AI 5AP 6 P7
++,=,, kilograms 54!A.<, per kilogramJ 6 4!E.,, per kilogram7
3 4!D,,,, %
J 4!-A-,,,, B ++,=,, kilograms 3 4!A.<, per kilogram
!aterials quantity variance 3 P 5AI 6 I7
4!E per kilogram 5++,=,, kilograms 6 +-,,,, kilograms7
3 4!-+,,,, U
.. !anagerial Accounting, -.th /dition
-. @umber of meals prepared..................... :,,,,
tandard direct labor$hours per meal..... C ,.+=
"otal direct labor$hours allowed.............. -,,,,
tandard direct labor cost per hour......... C >D.A=
"otal standard direct labor cost............... >D,A=,
Actual cost incurred................................ >D,<,,
"otal standard direct labor cost 5above7. D,A=,
"otal direct labor variance....................... > -=, %avorable
+. Actual )ours of
Input, at the
Actual 4ate
Actual )ours of Input,
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
D<, hours C
>-,.,, per hour
D<, hours C
>D.A= per hour
-,,,, hours C
>D.A= per hour
3 >D,<,, 3 >D,.<, 3 >D,A=,

4ate 2ariance,
>+:, U
/fficiency 2ariance,
>.D, %
"otal 2ariance,
>-=, %
?abor rate variance 3 A)5A4 6 47
3 D<, hours 5>-,.,, per hour 6 >D.A= per hour7
3 >+:, U
?abor efficiency variance 3 45A) 6 )7
3 >D.A= per hour 5D<, hours 6 -,,,, hours7
3 >.D, %
olutions !anual, *hapter -- .:
-. @umber of items shipped................................... -+,,,,,
tandard direct labor$hours per item................. C ,.,+
"otal direct labor$hours allowed......................... +,:,,
tandard variable overhead cost per hour......... C >..+=
"otal standard variable overhead cost............... > A,E,,
Actual variable overhead cost incurred.............. >A,.<,
"otal standard variable overhead cost 5above7. A,E,,
"otal variable overhead variance....................... > ::, %avorable
+. Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
+,.,, hours C
>..+, per hourJ
+,.,, hours C
>..+= per hour
+,:,, hours C
>..+= per hour
3 >A,.<, 3 >A,:A= 3 >A,E,,

2ariable &verhead
4ate 2ariance, >--= %
2ariable &verhead
>.+= %
"otal 2ariance,
>::, %
J>A,.<, B +,.,, hours 3 >..+, per hour
2ariable overhead rate variance1
A)5A4 6 47 3 +,.,, hours 5>..+, per hour 6 >..+= per hour7
3 >--= %
2ariable overhead efficiency variance1
45A) 6 )7 3 >..+= per hour 5+,.,, hours 6 +,:,, hours7
3 >.+= %
.= !anagerial Accounting, -.th /dition
-. "hroughput time 3 Process time K Inspection time K !ove time K
Iueue time
3 +.A days K ,.. days K -., days K =., days
3 D., days
+. &nly process time is value$added timeF therefore the manufacturing
cycle efficiency 5!*/7 is1
$ 2alue added time +.A days
!*/ 3 3 3 ,..,
"hroughput time D., days
.. If the !*/ is .,;, then .,; of the throughput time was spent in value$
added activities. *onsequently, the other A,; of the throughput time
was spent in non$value$added activities.
:. Lelivery cycle time 3 Mait time K "hroughput time
3 -:., days K D., days
3 +.., days
=. If all queue time is eliminated, then the throughput time drops to only :
days 5+.A K ,.. K -.,7. "he !*/ becomes1
$ 2alue added time +.A days
!*/ 3 3 3 ,.<A=
"hroughput time :., days
"hus, the !*/ increases to <A.=;. "his exercise shows quite
dramatically how lean production can improve the efficiency of
operations and reduce throughput time.
olutions !anual, *hapter -- .<
-. "he standard price of a kilogram of white chocolate is determined as
follows1
Purchase price, finest grade white chocolate......................... NA.=,
?ess purchase discount, E; of the purchase price of NA.=,. . 5,.<,7
hipping cost from the supplier in 0elgium............................ ,..,
4eceiving and handling cost.................................................. ,.,:
tandard price per kilogram of white chocolate...................... NA.+:
+. "he standard quantity, in kilograms, of white chocolate in a do#en
truffles is computed as follows1
!aterial requirements............................... ,.A,
Allowance for waste.................................. ,.,.
Allowance for reGects................................. ,.,+
tandard quantity of white chocolate........ ,.A=
.. "he standard cost of the white chocolate in a do#en truffles is
determined as follows1
tandard quantity of white chocolate 5a7....... ,.A= kilogram
tandard price of white chocolate 5b7............ NA.+: per kilogram
tandard cost of white chocolate 5a7 C 5b7.... N=.:.
.A !anagerial Accounting, -.th /dition
$%ercise 11- 5., minutes7
-. a. @otice in the solution below that the materials price variance is
computed on the entire amount of materials purchased, whereas the
materials quantity variance is computed only on the amount of
materials used in production.
Actual Iuantity
of Input, at
Actual Price
Actual Iuantity of
Input, at tandard Price
tandard Iuantity
tandard Price
+=,,,, microns C
>,.:E per micron
+=,,,, microns C
>,.=, per micron
-E,,,, micronsJ C
>,.=, per micron
3 >-+,,,, 3 >-+,=,, 3 >D,,,,

Price 2ariance,
>=,, %
+,,,,, microns C >,.=, per micron
3 >-,,,,,
Iuantity 2ariance,
>-,,,, U
J.,,,, toys C < microns per toy 3 -E,,,, microns
+=,,,, microns 5>,.:E per micron 6 >,.=, per micron7 3 >=,, %
>,.=, per micron 5+,,,,, microns 6 -E,,,, microns7 3 >-,,,, U
olutions !anual, *hapter -- .E
$%ercise 11- 5continued7
b. Lirect labor variances1
Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours Allowed
for &utput, at the
tandard 4ate
5A) C A47 5A) C 47 5) C 47
:,,,, hours C
>E.,, per hour
.,D,, hoursJ C
>E.,, per hour
>.<,,,, 3 >.+,,,, 3 >.-,+,,

4ate 2ariance,
>:,,,, U
>E,, U
"otal 2ariance,
>:,E,, U
J.,,,, toys C -.. hours per toy 3 .,D,, hours
?abor rate variance 3 A) 5A4 6 47
:,,,, hours 5>D.,, per hourJ 6 >E.,, per hour7 3 >:,,,, U
J>.<,,,, B :,,,, hours 3 >D.,, per hour
?abor efficiency variance 3 4 5A) 6 )7
>E.,, per hour 5:,,,, hours 6 .,D,, hours7 3 >E,, U
.D !anagerial Accounting, -.th /dition
$%ercise 11- 5continued7
+. A variance usually has many possible explanations. In particular, we
should always keep in mind that the standards themselves may be
incorrect. ome of the other possible explanations for the variances
observed at Lawson "oys appear below1
Materials Price Variance ince this variance is favorable, the actual price
paid per unit for the material was less than the standard price. "his could
occur for a variety of reasons including the purchase of a lower grade
material at a discount, buying in an unusually large quantity to take
advantage of quantity discounts, a change in the market price of the
material, or particularly sharp bargaining by the purchasing department.
Materials Quantity Variance ince this variance is unfavorable, more
materials were used to produce the actual output than were called for by
the standard. "his could also occur for a variety of reasons. ome of the
possibilities include poorly trained or supervised workers, improperly
adGusted machines, and defective materials.
Labor Rate Variance ince this variance is unfavorable, the actual
average wage rate was higher than the standard wage rate. ome of the
possible explanations include an increase in wages that has not been
reflected in the standards, unanticipated overtime, and a shift toward more
highly paid workers.
Labor Efficiency Variance ince this variance is unfavorable, the actual
number of labor hours was greater than the standard labor hours allowed
for the actual output. As with the other variances, this variance could have
been caused by any of a number of factors. ome of the possible
explanations include poor supervision, poorly trained workers, low$quality
materials requiring more labor time to process, and machine breakdowns.
In addition, if the direct labor force is essentially fixed, an unfavorable
labor efficiency variance could be caused by a reduction in output due to
decreased demand for the companyOs products.
It is worth noting that all of these variances could have been caused by
the purchase of low quality materials at a cut$rate price.
olutions !anual, *hapter -- :,
$%ercise 11-! 5+, minutes7
-. Actual Iuantity
of Input, at
Actual Price
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
+,,,,, pounds C
>+..= per pound
+,,,,, pounds C
>+.=, per pound
-E,:,, poundsJ C
>+.=, per pound
3 >:A,,,, 3 >=,,,,, 3 >:<,,,,

Price 2ariance,
>.,,,, %
Iuantity 2ariance,
>:,,,, U
"otal 2ariance,
>-,,,, U
J:,,,, units C :.< pounds per unit 3 -E,:,, pounds
+,,,,, pounds 5>+..= per pound 6 >+.=, per pound7 3 >.,,,, %
>+.=, per pound 5+,,,,, pounds 6 -E,:,, pounds7 3 >:,,,, U
:- !anagerial Accounting, -.th /dition
$%ercise 11-! 5continued7
+. Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
A=, hours C
>-+.,, per hour
E,, hoursJ C
>-+.,, per hour
>-,,:+= 3 >D,,,, 3 >D,<,,

4ate 2ariance,
>-,:+= U
><,, %
"otal 2ariance,
>E+= U
J:,,,, units C ,.+ hours per unit 3 E,, hours
A=, hours 5>-..D, per hourJ 6 >-+.,, per hour7 3 >-,:+= U
J-,,:+= B A=, hours 3 >-..D, per hour
>-+.,, per hour 5A=, hours 6 E,, hours7 3 ><,, %
olutions !anual, *hapter -- :+
$%ercise 11-" 5-= minutes7
@otice in the solution below that the materials price variance is
computed for the entire amount of materials purchased, whereas the
materials quantity variance is computed only for the amount of materials
used in production.
Actual Iuantity of
Input, at Actual Price
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
+,,,,, pounds C
>+..= per pound
+,,,,, pounds C
>+.=, per pound
-.,E,, poundsJ C
>+.=, per pound
3 >:A,,,, 3 >=,,,,, 3 >.:,=,,

Price 2ariance,
>.,,,, %
-:,A=, pounds C >+.=, per pound 3 >.<,EA=
Iuantity 2ariance,
>+,.A= U
J.,,,, units C :.< pounds per unit 3 -.,E,, pounds
+,,,,, pounds 5>+..= per pound 6 >+.=, per pound7 3 >.,,,, %
>+.=, per pound 5-:,A=, pounds 6 -.,E,, pounds7 3 >+,.A= U
:. !anagerial Accounting, -.th /dition
$%ercise 11-1# 5., minutes7
-. @umber of units manufactured................................ +,,,,,
tandard labor time per unit
5-E minutes B <, minutes per hour7..................... C ,..
"otal standard hours of labor time allowed.............. <,,,,
tandard direct labor rate per hour......................... C >-+
"otal standard direct labor cost............................... >A+,,,,
Actual direct labor cost............................................ >A.,<,,
tandard direct labor cost....................................... A+,,,,
"otal varianceHunfavorable.................................... > -,<,,
+. Actual )ours of
Input, at the
Actual 4ate
Actual )ours of Input, at
the tandard 4ate
tandard )ours Allowed
for &utput, at the
tandard 4ate
5A) C A47 5A) C 47 5) C 47
=,A=, hours C
>-+.,, per hour
<,,,, hoursJ C
>-+.,, per hour
>A.,<,, 3 ><D,,,, 3 >A+,,,,

4ate 2ariance,
>:,<,, U
>.,,,, %
"otal 2ariance,
>-,<,, U
J+,,,,, units C ,.. hours per unit 3 <,,,, hours
=,A=, hours 5>-+.E, per hourJ 6 >-+.,, per hour7 3 >:,<,, U
J>A.,<,, B =,A=, hours 3 >-+.E, per hour
>-+.,, per hour 5=,A=, hours 6 <,,,, hours7 3 >.,,,, %
olutions !anual, *hapter -- ::
$%ercise 11-1# 5continued7
.. Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
=,A=, hours C
>:.,, per hour
<,,,, hours C
>:.,, per hour
>+-,E=, 3 >+.,,,, 3 >+:,,,,

4ate 2ariance,
>-,-=, %
>-,,,, %
"otal 2ariance,
>+,-=, %
2ariable overhead rate variance 3 A) 5A4 6 47
=,A=, hours 5>..E, per hourJ 6 >:.,, per hour7 3 >-,-=, %
J>+-,E=, B =,A=, hours 3 >..E, per hour
2ariable overhead efficiency variance 3 4 5A) 6 )7
>:.,, per hour 5=,A=, hours 6 <,,,, hours7 3 >-,,,, %
:= !anagerial Accounting, -.th /dition
-. If the total variance is >D. unfavorable, and the rate variance is >EA
favorable, then the efficiency variance must be >-E, unfavorable,
because the rate and efficiency variances taken together always equal
the total variance. Pnowing that the efficiency variance is >-E,
unfavorable, one approach to the solution would be1
/fficiency variance 3 4 5A) 6 )7
>D.,, per hour 5A) 6 -+= hoursJ7 3 >-E, U
>D.,, per hour C A) 6 >-,-+= 3 >-E,JJ
>D.,, per hour C A) 3 >-,.,=
A) 3 >-,.,= B >D.,, per hour
A) 3 -:= hours
J=, Gobs C +.= hours per Gob 3 -+= hours
JJMhen used with the formula, unfavorable variances are positive and
favorable variances are negative.
+. 4ate variance 3 A) 5A4 6 47
-:= hours 5A4 6 >D.,, per hour7 3 >EA %
-:= hours C A4 6 >-,.,= 3 6>EAJ
-:= hours C A4 3 >-,+-E
A4 3 >-,+-E B -:= hours
A4 3 >E.:, per hour
JMhen used with the formula, unfavorable variances are positive and
favorable variances are negative.
olutions !anual, *hapter -- :<
$%ercise 11-11 5continued7
An alternative approach would be to work from known to unknown data
in the columnar model for variance analysis1
the Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
-:= hours C
>E.:, per hour
-:= hours C
>D.,, per hourJ
-+= hours
Q
C
>D.,, per hourJ
3 >-,+-E 3 >-,.,= 3 >-,-+=

4ate 2ariance,
>EA %J
>-E, U
"otal 2ariance,
>D. UJ
Q
=, tune$upsJ C +.= hours per tune$upJ 3 -+= hours
J(iven
:A !anagerial Accounting, -.th /dition
Pro&lem 11-12 5:= minutes7
-. a. In the solution below, the materials price variance is computed on the
entire amount of materials purchased whereas the materials quantity
variance is computed only on the amount of materials used in
production1
Actual Iuantity of
Input, at
Actual Price
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
tandard Price
-+,,,, ounces C
>+,.,, per ounce
D,.A= ouncesJ C
>+,.,, per ounce
>++=,,,, 3 >+:,,,,, 3 >-EA,=,,

Price 2ariance,
>-=,,,, %
D,=,, ounces C >+,.,, per ounce
3 >-D,,,,,
Iuantity 2ariance,
>+,=,, U
J.,A=, units C +.= ounces per unit 3 D,.A= ounces
-+,,,, ounces 5>-E.A= per ounceJ 6 >+,.,, per ounce7 3 >-=,,,, %
J>++=,,,, B -+,,,, ounces 3 >-E.A= per ounce
>+,.,, per ounce 5D,=,, ounces 6 D,.A= ounces7 3 >+,=,, U
b. Res, the contract probably should be signed. "he new price of >-E.A=
per ounce is substantially lower than the old price of >+,.,, per
ounce, resulting in a favorable price variance of >-=,,,, for the
month. !oreover, the material from the new supplier appears to
cause little or no problem in production as shown by the small
materials quantity variance for the month.
olutions !anual, *hapter -- :E
Pro&lem 11-12 5continued7
+. a.
Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
=,<,, hoursJ C
>-+.,, per hour
=,<,, hours C
>-+.=, per hour
=,+=, hoursJJ C
>-+.=, per hour
3 ><A,+,, 3 >A,,,,, 3 ><=,<+=

4ate 2ariance,
>+,E,, %
>:,.A= U
"otal 2ariance,
>-,=A= U
J.= technicians C -<, hours per technician 3 =,<,, hours
JJ.,A=, units C -.: hours per technician 3 =,+=, hrs
=,<,, hours 5>-+.,, per hour 6 >-+.=, per hour7 3 >+,E,, %
>-+.=, per hour 5=,<,, hours 6 =,+=, hours7 3 >:,.A= U
b. @o, the new labor mix probably should not be continued. Although it
decreases the average hourly labor cost from >-+.=, to >-+.,,,
thereby causing a >+,E,, favorable labor rate variance, this savings is
more than offset by a large unfavorable labor efficiency variance for
the month. "hus, the new labor mix increases overall labor costs.
:D !anagerial Accounting, -.th /dition
.. Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
=,<,, hoursJ C
>..=, per hour
=,+=, hoursJJ C
>..=, per hour
>-E,+,, 3 >-D,<,, 3 >-E,.A=

4ate 2ariance,
>-,:,, %
>-,++= U
"otal 2ariance,
>-A= %
J 0ased on direct labor hours1
.= technicians C -<, hours per technician 3 =,<,, hours
JJ .,A=, units C -.: hours per unit 3 =,+=, hours
=,<,, hours 5>..+= per hourJ 6 >..=, per hour7 3 >-,:,, %
J>-E,+,, B =,<,, hours 3 >..+= per hour
>..=, per hour 5=,<,, hours 6 =,+=, hours7 3 >-,++= U
0oth the labor efficiency variance and the variable overhead efficiency
variance are computed by comparing actual labor$hours to standard
labor$hours. "hus, if the labor efficiency variance is unfavorable, then
the variable overhead efficiency variance will be unfavorable as well.
olutions !anual, *hapter -- =,
Pro&lem 11-13 5., minutes7
-. a., b., and c.
Month
1 ! "
"hroughput timeHdays1
Process time 5x7................................... +.- +., -.D -.E
Inspection time..................................... ,.< ,.A ,.A ,.<
!ove time............................................. ,.: ,.. ,.: ,.:
Iueue time........................................... :.. =., =.E <.A
"otal throughput time 5y7...................... A.: E., E.E D.=
!anufacturing cycle efficiency 5!*/71
Process time 5x7 B
"hroughput time 5y7........................... +E.:; +=.,; +-.<; -E.D;
Lelivery cycle timeHdays1
Mait time from order to start of
production.......................................... -<., -A.= -D., +,.=
"hroughput time................................... A.: E., E.E D.=
"otal delivery cycle time....................... +..: +=.= +A.E .,.,
+. All of the performance measures display unfavorable trends. "hroughput
time per unit is increasingHlargely because of an increase in queue
time. !anufacturing cycle efficiency is declining and delivery cycle time
is increasing. In addition, the percentage of on$time deliveries has
dropped.
=- !anagerial Accounting, -.th /dition
.. a. and b.
Month
# $
"hroughput timeHdays1
Process time 5x7................................................. -.E -.E
Inspection time................................................... ,.< ,.,
!ove time........................................................... ,.: ,.:
Iueue time......................................................... ,., ,.,
"otal throughput time 5y7.................................... +.E +.+
Process time 5x7 B "hroughput time 5y7.............. <:..; E-.E;
As a company reduces non$value$added activities, the manufacturing
cycle efficiency increases rapidly. "he goal, of course, is to have an
efficiency of -,,;. "his will be achieved when all non$value$added
activities have been eliminated and process time is equal to throughput
time.
olutions !anual, *hapter -- =+
-. a.
Actual Iuantity of
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
<,,,,, pounds C
>-.D= per pound
<,,,,, pounds C
>+.,, per pound
:=,,,, poundsJ C
>+.,, per pound
3 >--A,,,, 3 >-+,,,,, 3 >D,,,,,

Price 2ariance,
>.,,,, %
:D,+,, pounds C >+.,, per pound 3 >DE,:,,
Iuantity 2ariance,
>E,:,, U
J-=,,,, pools C .., pounds per pool 3 :=,,,, pounds
<,,,,, pounds 5>-.D= per pound 6 >+.,, per pound7 3 >.,,,, %
>+.,, per pound 5:D,+,, pounds 6 :=,,,, pounds7 3 >E,:,, U
=. !anagerial Accounting, -.th /dition
b.
Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
--,E,, hours C
>A.,, per hour
--,E,, hours C
><.,, per hour
-+,,,, hoursJ C
><.,, per hour
3 >E+,<,, 3 >A,,E,, 3 >A+,,,,

4ate 2ariance,
>--,E,, U
>-,+,, %
"otal 2ariance,
>-,,<,, U
J-=,,,, pools C ,.E hours per pool 3 -+,,,, hours
--,E,, hours 5>A.,, per hour 6 ><.,, per hour7 3 >--,E,, U
><.,, per hour 5--,E,, hours 6 -+,,,, hours7 3 >-,+,, %
olutions !anual, *hapter -- =:
c.
Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
=,D,, hours C
>..,, per hour
<,,,, hoursJ C
>..,, per hour
>-E,+D, 3 >-A,A,, 3 >-E,,,,

4ate 2ariance,
>=D, U
>.,, %
"otal 2ariance,
>+D, U
J-=,,,, pools C ,.: hours per pool 3 <,,,, hours
=,D,, hours 5>..-, per hourJ 6 >..,, per hour7 3 >=D, U
J>-E,+D, B =,D,, hours 3 >..-, per hour
>..,, per hour 5=,D,, hours 6 <,,,, hours7 3 >.,, %
== !anagerial Accounting, -.th /dition
+. ummary of variances1
!aterial price variance............................ > .,,,, %
!aterial quantity variance....................... E,:,, U
?abor rate variance................................. --,E,, U
?abor efficiency variance........................ -,+,, %
2ariable overhead rate variance............. =D, U
2ariable overhead efficiency variance.... .,, %
@et variance........................................... >-<,+D, U
"he net unfavorable variance of >-<,+D, for the month caused the
plantOs variable cost of goods sold to increase from the budgeted level of
>-E,,,,, to >-D<,+D,1
0udgeted cost of goods sold at >-+ per pool.......... >-E,,,,,
Add the net unfavorable variance, as above........... -<,+D,
Actual cost of goods sold........................................ >-D<,+D,
"his >-<,+D, net unfavorable variance also accounts for the difference
between the budgeted net operating income and the actual net
operating income for the month.
0udgeted net operating income............................... >.<,,,,
Leduct the net unfavorable variance added to cost
of goods sold for the month.................................. -<,+D,
@et operating income.............................................. > -D ,A-,
.. "he two most significant variances are the materials quantity variance
and the labor rate variance. Possible causes of the variances include1
!aterials quantity variance1 &utdated standards, unskilled workers,
poorly adGusted machines,
carelessness, poorly trained workers,
inferior quality materials.
?abor rate variance1 &utdated standards, change in pay
scale, overtime pay.
olutions !anual, *hapter -- =<
-. "he standard quantity of plates allowed for tests performed during the
month would be1
0lood tests..................................... -,E,,
mears........................................... +,:,,
"otal................................................ :,+,,
Plates per test................................ C +
tandard quantity allowed.............. E,:,,
"he variance analysis for plates would be1
Actual Iuantity of
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
-+,,,, plates C
>+.=, per plate
E,:,, plates C
>+.=, per plate
>+E,+,, 3 >.,,,,, 3 >+-,,,,

Price 2ariance,
>-,E,, %
-,,=,, plates C >+.=, per plate 3 >+<,+=,
Iuantity 2ariance,
>=,+=, U
-+,,,, plates 5>+..= per plateJ 6 >+.=, per plate7 3 >-,E,, %
J>+E,+,, B -+,,,, plates 3 >+..= per plate.
>+.=, per plate 5-,,=,, plates 6 E,:,, plates7 3 >=,+=, U
=A !anagerial Accounting, -.th /dition
@ote that all of the price variance is due to the hospitalOs <; quantity
discount. Also note that the >=,+=, quantity variance for the month is
equal to +=; of the standard cost allowed for plates.
+. a. "he standard hours allowed for tests performed during the month
would be1
0lood tests1 ,.. hour per test C -,E,, tests............. =:, hours
mears1 ,.-= hour per test C +,:,, tests................ .<, hours
"otal standard hours allowed................................... D,, hours
"he variance analysis would be1
Actual )ours of
Input, at the
Actual 4ate
the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
-,-=, hours C
>-:.,, per hour
D,, hours C
>-:.,, per hour
>-.,E,, 3 >-<,-,, 3 >-+,<,,

4ate 2ariance,
>+,.,, %
>.,=,, U
"otal 2ariance,
>-,+,, U
-,-=, hours 5>-+.,, per hourJ 6 >-:.,, per hour7 3 >+,.,, %
J>-.,E,, B -,-=, hours 3 >-+.,, per hour
>-:.,, per hour 5-,-=, hours 6 D,, hours7 3 >.,=,, U
olutions !anual, *hapter -- =E
b. "he policy probably should not be continued. Although the hospital is
saving >+ per hour by employing more assistants than senior
technicians, this savings is more than offset by other factors. "oo
much time is being taken in performing lab tests, as indicated by the
large unfavorable labor efficiency variance. And, it seems likely that
most 5or all7 of the hospitalOs unfavorable quantity variance for plates
is traceable to inadequate supervision of assistants in the lab.
.. "he variable overhead variances follow1
Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
-,-=, hours C
><.,, per hour
D,, hours C
><.,, per hour
>A,E+, 3 ><,D,, 3 >=,:,,

4ate 2ariance,
>D+, U
>-,=,, U
"otal 2ariance,
>+,:+, U
-,-=, hours 5><.E, per hourJ 6 ><.,, per hour7 3 >D+, U
J>A,E+, B -,-=, hours 3 ><.E, per hour
><.,, per hour 5-,-=, hours 6 D,, hours7 3 >-,=,, U
Res, the two variances are closely related. 0oth are computed by
comparing actual labor time to the standard hours allowed for the output
of the period. "hus, if the labor efficiency variance is favorable 5or
unfavorable7, then the variable overhead efficiency variance will also be
favorable 5or unfavorable7.
=D !anagerial Accounting, -.th /dition
-. alex quantity standard1
4equired per -,$liter batch 5D.< liters B ,.E7........... -+., liters
?oss from reGected batches 5-S= C -+ liters7........... +.: liters
"otal quantity per good batch................................. -:.: liters
@yclyn quantity standard1
4equired per -,$liter batch 5-+ kilograms B ,.E7.... -=., kilograms
?oss from reGected batches 5-S= C -= kilograms7... .., kilograms
"otal quantity per good batch................................. -E., kilograms
Protet quantity standard1
4equired per -,$liter batch.................................... =., kilograms
?oss from reGected batches 5-S= C = kilograms7..... -., kilograms
"otal quantity per good batch................................. <., kilograms
+. "otal minutes per E$hour day.................................... :E, minutes
?ess rest breaks and cleanup................................... <, minutes
Productive time each day......................................... :+, minutes
Productive time each day :+, minutes per day
3
"ime required per batch .= minutes per batch
3 -+ batches per day
"ime required per batch............................................ .= minutes
4est breaks and clean up time
5<, minutes B -+ batches7..................................... = minutes
"otal.......................................................................... :, minutes
?oss from reGected batches 5-S= C :, minutes7........ E minutes
"otal time per good batch......................................... :E minutes
olutions !anual, *hapter -- <,
.. tandard cost card1
Standard
Quantity or
%ime
Standard Price
or Rate
Standard
Cost
alex..................... -:.: liters >-.=, per liter >+-.<,
@yclyn................... -E., kilograms >+.E, per kilogram =,.:,
Protet.................... <., kilograms >..,, per kilogram -E.,,
?abor time............. :E
or ,.E
minutes,
hour >D.,, per hour A.+,
"otal standard cost
per acceptable
batch.................. >DA.+,
<- !anagerial Accounting, -.th /dition
-. a., b., and c.
Month
1 ! "
"hroughput time in days1
Process time.................................... +.- +., -.D -.E
Inspection time................................. ,.E ,.A ,.A ,.A
!ove time........................................ ,.. ,.: ,.: ,.=
Iueue time during production.......... +.E :.: <., A.,
"otal throughput time....................... <., A.= D., -,.,
Process time B "hroughput time...... .=.,; +<.A; +-.-; -E.,;
Lelivery cycle time in days1
Mait time to start of production........ D., --.= -+., -:.,
"hroughput time............................... <., A.= D., -,.,
"otal delivery cycle time................... -=., -D., +-., +:.,
+. a. Areas where the company is improving1
Quality control& "he number of defects has decreased by over =,; in
the last four months. !oreover, both warranty claims and customer
complaints are down sharply. In short, overall quality appears to have
significantly improved.
Material control& "he purchase order lead time is only half of what it
was four months ago, which indicates that purchases are arriving in
less time. "his trend may be a result of the companyOs move toward
TI" purchasing.
'eli(ery performance& "he process time has decreased from +.- days
to -.E days over the last four months.
olutions !anual, *hapter -- <+
b. Areas of deterioration1
Material control& crap as a percentage of total cost has tripled over
the last four months.
Machine performance& !achine downtime has doubled over the last
four months. "his may be a result of the greater setup time, or it may
Gust reflect efforts to get the new equipment operating properly. Also
note that use of the machines as a percentage of availability is
declining rapidly.
'eli(ery performance& All delivery performance measures are moving
in the wrong direction. "hroughput time and delivery cycle time are
both increasing, and the manufacturing cycle efficiency is decreasing.
.. a. and b.
Month
# $
"hroughput time in days1
Process time............................................ -.E -.E
Inspection time......................................... ,.A ,.,
!ove time................................................. ,.= ,.=
Iueue time during production.................. ,., ,.,
"otal throughput time................................ .., +..
Process time B "hroughput time.............. <,.,; AE..;
As non$value$added activities are eliminated, the manufacturing cycle
efficiency improves. "he goal, of course, is to have an efficiency of
-,,;. "his is achieved when all non$value$added activities have been
eliminated and process time equals throughput time.
<. !anagerial Accounting, -.th /dition
Pro&lem 11-1! 5:= minutes7
"his problem is more difficult than it looks. Allow ample time for discussion.
-.
Actual Iuantity of
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
-+,,,, yards C
>:.,, per yardJ
--,+,, yardsJJ C
>:.,, per yardJ
>:=,<,, 3 >:E,,,, 3 >::,E,,

Price 2ariance,
>+,:,, %
Iuantity 2ariance,
>.,+,, U
"otal 2ariance,
>E,, U
J >++.:, B =.< yards 3 >:.,, per yard
JJ +,,,, sets C =.< yards per set 3 --,+,, yards
-+,,,, yards 5>..E, per yardJ 6 >:.,, per yard7 3 >+,:,, %
J>:=,<,, B -+,,,, yards 3 >..E, per yard
>:.,, per yard 5-+,,,, yards 6 --,+,, yards7 3 >.,+,, U
olutions !anual, *hapter -- <:
Pro&lem 11-1! 5continued7
+. !any students will miss parts + and . because they will try to use
product costs as if they were hourly costs. Pay particular attention to the
computation of the standard direct labor time per unit and the standard
direct labor rate per hour.
Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
+,E,, hours C
><.,, per hourJ
.,,,, hoursJJ C
><.,, per hourJ
>-E,+,, 3 >-<,E,, 3 >-E,,,,

4ate 2ariance,
>-,:,, U
>-,+,, %
"otal 2ariance,
>+,, U
J +,E=, standard hours B -,D,, sets 3 -.= standard hours per set,
>D.,, standard cost per set B -.= standard hours per set 3 ><.,,
standard rate per hour.
JJ +,,,, sets C -.= standard hours per set 3 .,,,, standard hours.
+,E,, hours 5><.=, per hourJ 6 ><.,, per hour7 3 >-,:,, U
J>-E,+,, B +,E,, hours 3 ><.=, per hour
><.,, per hour 5+,E,, hours 6 .,,,, hours7 3 >-,+,, %
<= !anagerial Accounting, -.th /dition
Pro&lem 11-1! 5continued7
.. Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
+,E,, hours C
>+.:, per hourJ
.,,,, hours C
>+.:, per hourJ
>A,,,, 3 ><,A+, 3 >A,+,,

4ate 2ariance,
>+E, U
>:E, %
"otal 2ariance,
>+,, %
J>..<, standard cost per set B -.= standard hours per set
3 >+.:, standard rate per hour
+,E,, hours 5>+.=, per hourJ 6 >+.:, per hour7 3 >+E, U
J>A,,,, B +,E,, hours 3 >+.=, per hour
>+.:, per hour 5+,E,, hours 6 .,,,, hours7 3 >:E, %
olutions !anual, *hapter -- <<
Pro&lem 11-1" 5:= minutes7
-. a. !aterials quantity variance 3 P 5AI 6 I7
>=.,, per foot 5AI 6 D,<,, feetJ7 3 >:,=,, U
>=.,, per foot C AI 6 >:E,,,, 3 >:,=,,JJ
>=.,, per foot C AI 3 >=+,=,,
AI 3 -,,=,, feet
J >.,+,, units C . foot per unit
JJ Mhen used with the formula, unfavorable variances are
positive and favorable variances are negative.
"herefore, >==,<=, B -,,=,, feet 3 >=.., per foot
b. !aterials price variance 3 AI 5AP 6 P7
-,,=,, feet 5>=.., per foot 6 >=.,, per foot7 3 >.,-=, U
"he total variance for materials is1
!aterials price variance................... >.,-=, U
!aterials quantity variance.............. :,=,, U
"otal variance................................... >A,<=, U
Alternative approach to parts 5a7 and 5b71
Actual Iuantity of
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
tandard Price
-,,=,, feet C
>=.., per foot
-,,=,, feet C
>=.,, per footJ
D,<,, feetJJ C
>=.,, per footJ
3 >==,<=,J 3 >=+,=,, 3 >:E,,,,

Price 2ariance,
>.,-=, U
Iuantity 2ariance,
>:,=,, UJ
"otal 2ariance,
>A,<=, U
J (iven
JJ .,+,, units C . foot per unit 3 D,<,, feet
<A !anagerial Accounting, -.th /dition
Pro&lem 11-1" 5continued7
+. a. ?abor rate variance 3 A) 5A4 6 47
:,D,, hours 5>A.=, per hourJ 6 47 3 >+,:=, %JJ
>.<,A=, 6 :,D,, hours C 4 3 6>+,:=,JJJ
:,D,, hours C 4 3 >.D,+,,
4 3 >E.,,
J >.<,A=, B :,D,, hours
JJ >-,<=, % K >E,, U.
JJJ Mhen used with the formula, unfavorable variances are
positive and favorable variances are negative.
b. ?abor efficiency variance 3 4 5A) 6 )7
>E per hour 5:,D,, hours 6 )7 3 >E,, U
>.D,+,, 6 >E per hour C ) 3 >E,,J
>E per hour C ) 3 >.E,:,,
) 3 :,E,, hours
J Mhen used with the formula, unfavorable variances are positive
and favorable variances are negative.
Alternative approach to parts 5a7 and 5b71
Actual )ours of
Input, at the
Actual 4ate
the tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
:,D,, hoursJ C
>E.,, per hour
:,E,, hours C
>E.,, per hour
>.<,A=,J 3 >.D,+,, 3 >.E,:,,

4ate 2ariance,
>+,:=, %
>E,, UJ
"otal 2ariance,
>-,<=, %J
J(iven.
c. "he standard hours allowed per unit of product are1
:,E,, hours B .,+,, units 3 -.= hours per unit
olutions !anual, *hapter -- <E
-. tandard cost for a ten$gallon batch of raspberry sherbet.
Lirect material1
4aspberries 5A.= quarts
-
C >,.E, per quart7................ ><.,,
&ther ingredients 5-, gallons C >,.:= per gallon7....... :.=, >-,.=,
Lirect labor1
orting 5-E minutes
+
B <, minutes per hour7 C >D.,,
per hour.................................................................... +.A,
0lending 5-+ minutes B <, minutes per hour7 C >D.,,
per hour.................................................................... -.E, :.=,
Packing 5:, quarts
.
C >,..E per quart7....................... -=.+,
tandard cost per ten$gallon batch................................ >.,.+,
-
< quarts C 5= B :7 3 A.= quarts required to obtain < acceptable quarts.
+
. minutes per quart C < quarts.
.
: quarts per gallon C -, gallons 3 :, quarts.
+. a. In general, the purchasing manager is held responsible for
unfavorable material price variances. *auses of these variances
include the following1
U Incorrect standards.
U %ailure to correctly forecast price increases.
U Purchasing in nonstandard or uneconomical lots.
U %ailure to take available purchase discounts.
U %ailure to control transportation costs.
U Purchasing from suppliers other than those offering the most
favorable terms.
)owever, failure to meet price standards may be caused by an
unexpected increase in orders or changes in production schedules. In
this case, the responsibility for unfavorable material price variances
should rest with the sales manager or the manager of production
planning. 2ariances may also be caused by external events that are
uncontrollable, e.g., a strike at a supplierOs plant.
<D !anagerial Accounting, -.th /dition
b. In general, the production manager or foreman is held responsible for
unfavorable labor efficiency variances. *auses of these variances
include the following1
U Incorrect standards.
U Poorly trained labor.
U ubstandard or inefficient equipment.
U Inadequate supervision.
U !achine breakdowns from poor maintenance.
U Poorly motivated employees.
U %ixed labor force with demand less than capacity.
%ailure to meet labor efficiency standards may also be caused by the
use of inferior materials or poor production planning. In these cases,
responsibility should rest with the purchasing manager or the
manager of production planning. 2ariances may also be caused by
external events that are uncontrollable, e.g., low unemployment
leading to the inability to hire and retain skilled workers.
5Unofficial *!A olution, adapted7
olutions !anual, *hapter -- A,
Case 11-22 5., minutes7
"his case may be difficult for some students to grasp because it requires
looking at standard costs from an entirely different perspective. In this case,
standard costs have been inappropriately used as a means to manipulate
reported earnings rather than as a way to control costs.
-. ?ansing has evidently set very loose standards in which the standard
prices and standard quantities are far too high. "his guarantees that
favorable variances will ordinarily result from operations. If the standard
costs are set artificially high, the standard cost of goods sold will be
artificially high and thus the divisionOs net operating income will be
depressed until the favorable variances are recogni#ed. If ?ansing saves
the favorable variances, he can release Gust enough in the second and
third quarters to show some improvement and then he can release all of
the rest in the last quarter, creating the annual 8*hristmas present.9
+. ?ansing should not be permitted to continue this practice for several
reasons. %irst, it distorts the quarterly earnings for both the division and
the company. "he distortions of the divisionOs quarterly earnings are
troubling because the manipulations may mask real signs of trouble. "he
distortions of the companyOs quarterly earnings are troubling because
they may mislead external users of the financial statements. econd,
?ansing should not be rewarded for manipulating earnings. "his sets a
moral tone in the company that is likely to lead to even deeper trouble.
Indeed, the permissive attitude of top management toward the
manipulation of earnings may indicate the existence of other, even more
serious, ethical problems in the company. "hird, a clear message should
be sent to division managers like ?ansing that their Gob is to manage
their operations, not their earnings. If they keep on top of operations and
manage well, the earnings should take care of themselves.
A- !anagerial Accounting, -.th /dition
Case 11-22 5continued7
.. tacy *ummins does not have any easy alternatives available. he has
already taken the problem to the President, who was not interested. If
she goes around the President to the 0oard of Lirectors, she will be
putting herself in a politically difficult position with little likelihood that it
will do much good if, in fact, the 0oard of Lirectors already knows what
is going on.
&n the other hand, if she simply goes along, she will be violating the
*redibility standard of ethical conduct for management accountants. "he
)ome ecurity LivisionOs manipulation of quarterly earnings does distort
the entire companyOs quarterly reports. And the *redibility standard
clearly stipulates that management accountants have a responsibility to
8disclose all relevant information that could reasonably be expected to
influence an intended userOs understanding of the reports, analyses, or
recommendations.9 Apart from the ethical issue, there is also a very
practical consideration. If !erced )ome Products becomes embroiled in
controversy concerning questionable accounting practices, tacy
*ummins will be viewed as a responsible party by outsiders and her
career is likely to suffer dramatically and she may even face legal
problems.
Me would suggest that !s. *ummins quietly bring the manipulation of
earnings to the attention of the audit committee of the 0oard of
Lirectors, carefully laying out in a non$confrontational manner the
problems created by ?ansingOs practice of manipulating earnings. If the
President and the 0oard of Lirectors are still not interested in dealing
with the problem, she may reasonably conclude that the best alternative
is to start looking for another Gob.
olutions !anual, *hapter -- A+
Case 11-23 5<, minutes7
-. "he number of units produced can be computed by using the total
standard cost applied for the period for any inputHdirect materials,
direct labor, or variable manufacturing overhead. Using the standard
cost applied for direct materials, we have1
"otal standard cost applied for the period >:,=,,,,
3
tandard cost per unit >-E per unit
3 ++,=,, units
"he same answer can be obtained by using direct labor or variable
manufacturing overhead.
+. -.E,,,, poundsF see below for a detailed analysis.
.. >+.D= per poundF see below for a detailed analysis.
:. -D,:,, direct labor$hoursF see below for a detailed analysis.
=. >-=.A= per direct labor$hourF see below for a detailed analysis.
<. tandard variable overhead cost applied >=:,,,,
Add1 &verhead efficiency variance......... :,+,, U 5see below7
Leduct1 &verhead rate variance............. -,.,, %
Actual variable overhead cost incurred... >=<,D,,
A. !anagerial Accounting, -.th /dition
Lirect materials analysis1
Actual Iuantity of
Inputs, at Actual
Price
Actual Iuantity
of Inputs, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
-.E,,,, pounds
C >+.D= per poundJJJ
-.E,,,, poundsJJ
C >. per pound
-.=,,,, poundsJ
C >. per pound
3 >:,A,-,, 3 >:-:,,,, 3 >:,=,,,,
Price 2ariance,
><,D,, %
Iuantity 2ariance,
>D,,,, U
"otal 2ariance,
>+,-,, U
J ++,=,, units C < pounds per unit 3 -.=,,,, pounds
JJ >:-:,,,, B >. per pound 3 -.E,,,, pounds
JJJ >:,A,-,, B -.E,,,, pounds 3 >+.D= per pound
Lirect labor analysis1
at the Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
-D,:,, L?)s C
>-=.A= per L?)JJJ
-D,:,, L?)sJJ C
>-= per L?)
-E,,,, L?)sJ C
>-= per L?)
3 >.,=,==, 3 >+D-,,,, 3 >+A,,,,,

4ate 2ariance,
>-:,==, U
>+-,,,, U
"otal 2ariance,
>.=,==, U
J ++,=,, units C ,.E L?)s per unit 3 -E,,,, L?)s
JJ >+D-,,,, B >-= per L?) 3 -D,:,, L?)s
JJJ >.,=,==, B -D,:,, L?)s 3 >-=.A= per L?)
olutions !anual, *hapter -- A:
2ariable overhead analysis1
at the Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
>=<,D,,JJ -D,:,, L?)s C
>. per L?)
-E,,,, L?)s C
>. per L?)
3 >=E,+,, 3 >=:,,,,
4ate 2ariance,
>-,.,, %
>:,+,, UJ
J *omputed using -D,:,, actual L?)s at the >. per L?) standard rate.
JJ >=E,+,, 6 >-,.,, 3 >=<,D,,.
A= !anagerial Accounting, -.th /dition
'ppendi% 11'
Predetermined O(erhead )ates and O(erhead
'nal*sis in a Standard Costing S*stem
$%ercise 11'-1 5-= minutes7
-. "he total overhead cost at the denominator level of activity must be
determined before the predetermined overhead rate can be computed.
"otal fixed overhead cost per year.................................... >+=,,,,,
"otal variable overhead cost
5>+ per L?) C :,,,,, L?)s7.......................................... E,,,,,
"otal overhead cost at the denominator level of activity. . . >..,,,,,
&verhead at the denominator level of activity
Predetermined
3
overhead rate
Lenominator level of activity
>..,,,,,
3 3 >E.+= per L?)
:,,,,, L?)s
+. tandard direct labor$hours allowed for
the actual output 5a7.............................. .E,,,, L?)s
Predetermined overhead rate 5b7............. >E.+= per L?)
&verhead applied 5a7 C 5b7....................... >.-.,=,,
olutions !anual, Appendix --A A<
-.
%ixed overhead
%ixed portion of the
3
predetermined overhead rate
Lenominator level of activity
>+=,,,,,
3
+=,,,, L?)s
3 >-,.,, per L?)
+.
0udget Actual fixed 0udgeted fixed
3 $
variance overhead overhead
3 >+=:,,,, $ >+=,,,,,
3 >:,,,, U
( )
%ixed portion of
2olume Lenominator tandard hours
3 the predetermined C $
variance hours allowed
overhead rate
3 >-,.,, per L?) C 5+=,,,, L?)s $ +<,,,, L?)s7
3 >-,,,,, %
AA !anagerial Accounting, -.th /dition
-.
"otal overhead at the
denominator activity
Predetermined
3
overhead rate
Lenominator activity
>-.D, per L?) C .,,,,, per L?) K >-<E,,,,
3
.,,,,, L?)s
>++=,,,,
3
.,,,,, L?)s
3 >A.=, per L?)
2ariable element1 5>-.D, per L?) C .,,,,, L?)s7 B .,,,,, L?)s 3
>=A,,,, B .,,,,, L?)s 3 >-.D, per L?)
%ixed element1 >-<E,,,, B .,,,,, L?)s 3 >=.<, per L?)
+. Lirect materials, +.= yards C >E.<, per yard......................... >+-.=,
Lirect labor, . L?)sJ C >-+.,, per L?)............................... .<.,,
2ariable manufacturing overhead, . L?)s C >-.D, per L?) =.A,
%ixed manufacturing overhead, . L?)s C >=.<, per L?).... -<.E,
"otal standard cost per unit................................................... >E,.,,
J.,,,,, L?)s B -,,,,, units 3 . L?)s per unit.
olutions !anual, Appendix --A AE
$%ercise 11'-4 5+, minutes7
-. >. per !) C <,,,,, !)s K >.,,,,,,
Predetermined
3
overhead rate
<,,,,, !)s
>:E,,,,,
3
<,,,,, !)s
3 >E per !)
2ariable portion of
>. per !) C <,,,,, !)s
the predetermined 3
<,,,,, !)s
overhead rate
>-E,,,,,
3
<,,,,, !)s
3 >. per !)
%ixed portion of
>.,,,,,,
the predetermined 3
<,,,,, !)s
overhead rate
3 >= per !)
+. "he standard hours per unit of product are1
<,,,,, hours B :,,,,, units 3 -.= hours per unit
(iven this figure, the standard hours allowed for the actual production
would be1
:+,,,, units C -.= hours per unit 3 <.,,,, standard hours allowed.
<,,,,, denominator hours C >= per hour 3 >.,,,,,,.
AD !anagerial Accounting, -.th /dition
$%ercise 11'-4 5continued7
.. 2ariable overhead rate variance1
2ariable overhead rate variance 3 5A) C A47 6 5A) C 47
5>-E=,<,,7 6 5<:,,,, hours C >. per hour7 3 ><,:,, %
2ariable overhead efficiency variance1
>. per hour 5<:,,,, hours 6 <.,,,, hours7 3 >.,,,, U
"he fixed overhead variances are as follows1
Actual %ixed
&verhead
0udgeted %ixed
&verhead
%ixed &verhead Applied to
Mork in Process
>.,+,:,, >.,,,,,,J <.,,,, hours C >= per hour
3 >.-=,,,,

0udget 2ariance,
>+,:,, U
2olume 2ariance,
>-=,,,, %
JAs originally budgeted.
Alternative approach to the budget variance1
3 $
3 >.,+,:,, $ >.,,,,,,
3 >+,:,, U
Alternative approach to the volume variance1

%ixed portion of tandard

2olume Lenominator
3 the predetermined $ hours
2ariance hours
overhead rate allowed
3 >= per hour 5<,,,,, hours $ <.,,,, hours7
3 >-=,,,, %
olutions !anual, Appendix --A E,
$%ercise 11'-5 5-, minutes7
*ompany A1 "his company has a favorable volume variance because the
standard hours allowed for the actual production are greater
than the denominator hours.
*ompany 01 "his company has an unfavorable volume variance because
the standard hours allowed for the actual production are less
than the denominator hours.
*ompany *1 "his company has no volume variance because the standard
hours allowed for the actual production and the denominator
hours are the same.
E- !anagerial Accounting, -.th /dition
-. D,=,, units C : hours per unit 3 .E,,,, hours.
+. and ..
Actual %ixed
&verhead
0udgeted %ixed
&verhead
Mork in Process
>-DE,A,,J >+,,,,,, .E,,,, hours C >= per hourJ
3 >-D,,,,,

0udget 2ariance,
>-,.,, %
2olume 2ariance,
>-,,,,, UJ
J(iven.
:.
>+,,,,,,
3
3 >= per hour
0udgeted fixed overhead
%ixed element of the
3
"herefore, the denominator activity is1 >+,,,,,, B >= per hour 3 :,,,,,
hours.
olutions !anual, Appendix --A E+
$%ercise 11'- 5-= minutes7
-. -:,,,, units produced C . !)s per unit 3 :+,,,, !)s
+. Actual fixed overhead incurred.................. >+<A,,,,
Add1 %avorable budget variance............... .,,,,
0udgeted fixed overhead cost................... >+A,,,,,
>+A,,,,,
3
:=,,,, !)s
3 >< per !)
0udgeted fixed overhead
%ixed element of the
3
..
2olume Lenominator
2ariance hours
3 >< per !) 5:=,,,, !)s $ :+,,,, !)s7
3 >-E,,,, U

Alternative solution to parts -$.1
Actual %ixed
&verhead
0udgeted %ixed
&verhead
%ixed &verhead Applied
to Mork in Process
>+<A,,,,J >+A,,,,,
-
:+,,,, !)s
+
C >< per !)
.
3 >+=+,,,,

0udget 2ariance,
>.,,,, %J
2olume 2ariance,
>-E,,,, U
-
>+<A,,,, K >.,,,, 3 >+A,,,,,.
+
-:,,,, units C . !)s per unit 3 :+,,,, !)s
.
>+A,,,,, B :=,,,, denominator !)s 3 >< per !)
J(iven.
E. !anagerial Accounting, -.th /dition
Pro&lem 11'-! 5., minutes7
-. Lirect materials, . yards C >:.:, per yard................................. >-..+,
Lirect labor, - L?) C >-+.,, per L?)....................................... -+.,,
2ariable manufacturing overhead, - L?) C >=.,, per L?)J..... =.,,
%ixed manufacturing overhead, - L?) C >--.E, per L?)JJ...... --.E,
tandard cost per unit............................................................... >:+.,,
J >+=,,,, B =,,,, L?)s 3 >=.,, per L?).
JJ >=D,,,, B =,,,, L?)s 3 >--.E, per L?).
+. !aterials variances1
+:,,,, yards 5>:.E, per yard 6 >:.:, per yard7 3 >D,<,, U
>:.:, per yard 5-E,=,, yards 6 -E,,,, yardsJ7 3 >+,+,, U
J<,,,, units C . yards per unit 3 -E,,,, yards
?abor variances1
=,E,, L?)s 5>-..,, per L?) 6 >-+.,, per L?)7 3 >=,E,, U
>-+.,, per L?) 5=,E,, L?)s 6 <,,,, L?)sJ7 3 >+,:,, %
J<,,,, units C - L?) per unit 3 <,,,, L?)s
olutions !anual, Appendix --A E:
Pro&lem 11'-! 5continued7
.. 2ariable overhead variances1
Actual L?)s of
Input, at the
Actual 4ate
Actual L?)s of
Input, at the
tandard 4ate
tandard L?)s
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
>+D,=E, =,E,, L?)s
C >=.,, per L?)
<,,,, L?)s
C >=.,, per L?)
3 >+D,,,, 3 >.,,,,,

4ate 2ariance,
>=E, U
>-,,,, %
"otal 2ariance,
>:+, %
Alternative solution for the variable overhead variances1
5>+D,=E,7 6 5=,E,, L?)s C >=.,, per L?)7 3 >=E, U
>=.,, per L?) 5=,E,, L?)s 6 <,,,, L?)s7 3 >-,,,, %
%ixed overhead variances1
Actual %ixed
&verhead
0udgeted %ixed
&verhead
%ixed &verhead
Applied to
Mork in Process
><,,:,, >=D,,,, <,,,, L?)s
C >--.E, per L?)
3 >A,,E,,

0udget 2ariance,
>-,:,, U
2olume 2ariance,
>--,E,, %
E= !anagerial Accounting, -.th /dition
Pro&lem 11'-! 5continued7
Alternative approach to the budget variance1
3 $
3 ><,,:,, $ >=D,,,,
3 >-,:,, U
Alternative approach to the volume variance1


2olume Lenominator
2ariance hours
3 >--.E, per L?) 5=,,,, L?)s $ <,,,, L?)s7
3 >--,E,, %
:. "he choice of a denominator activity level affects standard unit costs in
that the higher the denominator activity level chosen, the lower standard
unit costs will be. "he reason is that the fixed portion of overhead costs
is spread over more units as the denominator activity rises.
"he volume variance cannot be controlled by controlling spending. "he
volume variance simply reflects whether actual activity was greater than
or less than the denominator activity. "hus, the volume variance is
controllable only through activity.
olutions !anual, Appendix --A E<
Pro&lem 11'-" 5:= minutes7
-. Lirect materials price and quantity variances1
<:,,,, feet 5>E.== per foot 6 >E.:= per foot7 3 ><,:,, U
>E.:= per foot 5<:,,,, feet 6 <,,,,, feetJ7 3 >..,E,, U
J.,,,,, units C + feet per unit 3 <,,,,, feet
+. Lirect labor rate and efficiency variances1
:.,=,, L?)s 5>-=.E, per L?) 6 >-<.,, per L?)7 3 >E,A,, %
>-<.,, per L?) 5:.,=,, L?)s 6 :+,,,, L?)sJ7 3 >+:,,,, U
J.,,,,, units C -.: L?)s per unit 3 :+,,,, L?)s
.. a. 2ariable overhead spending and efficiency variances1
Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
>-,E,,,, :.,=,, L?)s
C >+.=, per L?)
:+,,,, L?)s
C >+.=, per L?)
3 >-,E,A=, 3 >-,=,,,,

4ate 2ariance,
>A=, %
>.,A=, U
Alternative solution1
5>-,E,,,,7 6 5:.,=,, L?)s C >+.=, per L?)7 3 >A=, %
>+.=, per L?) 5:.,=,, L?)s 6 :+,,,, L?)s7 3 >.,A=, U
EA !anagerial Accounting, -.th /dition
Pro&lem 11'-" 5continued7
b. %ixed overhead budget and volume variances1
Actual %ixed
&verhead
0udgeted %ixed
&verhead
Mork in Process
>+--,E,, >+-,,,,,J :+,,,, L?)s C >< per L?)
3 >+=+,,,,

0udget 2ariance,
>-,E,, U
2olume 2ariance,
>:+,,,, %
JAs originally budgeted. "his figure can also be expressed as1 .=,,,,
denominator L?)s C >< per L?) 3 >+-,,,,,.
0udget variance1
3 $
3 >+--,E,, $ >+-,,,,,
3 >-,E,, U
2olume variance1


2olume Lenominator
2ariance hours
3 ><.,, per L?) 5.=,,,, L?)s $ :+,,,, L?)s7
3 >:+,,,, %
olutions !anual, Appendix --A EE
Pro&lem 11'-" 5continued7
:. "he total of the variances would be1
Lirect materials variances1
Price variance................................................ > <,:,, U
Iuantity variance........................................... ..,E,, U
Lirect labor variances1
4ate variance................................................. E,A,, %
/fficiency variance......................................... +:,,,, U
2ariable manufacturing overhead variances1
4ate variance................................................. A=, %
/fficiency variance......................................... .,A=, U
%ixed manufacturing overhead variances1
0udget variance............................................. -,E,, U
2olume variance............................................ :+,,,, %
"otal of variances.............................................. >-E,.,, U
@ote that the total of the variances agrees with the >-E,.,, variance
mentioned by the president.
It appears that not everyone should be given a bonus for good cost
control. "he materials quantity variance and the labor efficiency variance
are <.A; and ..<;, respectively, of the standard cost allowed and thus
would warrant investigation.
"he companyOs large unfavorable variances 5for materials quantity and
labor efficiency7 do not show up more clearly because they are offset by
the favorable volume variance. "his favorable volume variance is a
result of the company operating at an activity level that is well above the
denominator activity level used to set predetermined overhead rates.
5"he company operated at an activity level of :+,,,, standard hoursF the
denominator activity level set at the beginning of the year was .=,,,,
hours.7 As a result of the large favorable volume variance, the
unfavorable quantity and efficiency variances have been concealed in a
small 8net9 figure. "he large favorable volume variance may have been
achieved by building up inventories.
ED !anagerial Accounting, -.th /dition
Pro&lem 11'-1# 5:= minutes7
-.
PV+DA,=,,
"otal rate1 3 PVE.=, per hour
.=,,,, hours
PVEA,=,,
2ariable rate1 3 PV+.=, per hour
.=,,,, hours
PV+-,,,,,
%ixed rate1 3 PV<.,, per hour
.=,,,, hours
+. .+,,,, standard hours C PVE.=, per hour 3 PV+A+,,,,.
.. 2ariable overhead variances1
Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
PVAE,,,, .,,,,, hours C
PV+.=, per hour
.+,,,, hours C
PV+.=, per hour
3 PVA=,,,, 3 PVE,,,,,

4ate 2ariance,
PV.,,,, U
PV=,,,, %
5PVAE,,,,7 6 5.,,,,, hours C PV+.=, per hour7 3 PV.,,,, U
PV+.=, per hour 5.,,,,, hours 6 .+,,,, hours7 3 PV=,,,, %
olutions !anual, Appendix --A D,
Pro&lem 11'-1# 5continued7
Actual %ixed
&verhead
0udgeted %ixed
&verhead
Mork in Process
PV+,D,:,, PV+-,,,,, .+,,,, hours C
PV< per hour 3 PV-D+,,,,

0udget 2ariance,
PV<,, %
2olume 2ariance,
PV-E,,,, U
0udget variance1
3 $
3 PV+,D,:,, $ PV+-,,,,,
3 PV<,, %
2olume variance1
2olume Lenominator
2ariance hours
3 PV<.,, per hour 5.=,,,, hours $ .+,,,, hours7
3 PV-E,,,, U

2erification1
2ariable overhead rate variance........ PV .,,,, U
2ariable overhead efficiency variance =,,,, %
%ixed overhead budget variance........ <,, %
%ixed overhead volume variance....... -E,,,, U
Underapplied overhead...................... PV-=,:,, U
D- !anagerial Accounting, -.th /dition
Pro&lem 11'-1# 5continued7
:. 2ariable overhead
Rate (ariance) "his variance includes both price and quantity elements.
"he overhead spending variance reflects differences between actual
and standard prices for variable overhead items. It also reflects
differences between the amounts of variable overhead inputs that were
actually used and the amounts that should have been used for the
actual output of the period. 0ecause the variable overhead spending
variance is unfavorable, either too much was paid for variable overhead
items or too many of them were used.
Efficiency (ariance) "he term 8variable overhead efficiency variance9 is a
misnomer, because the variance does not measure efficiency in the use
of overhead items. It measures the indirect effect on variable overhead
of the efficiency or inefficiency with which the activity base is utili#ed. In
this company, the activity base is labor$hours. If variable overhead is
really proportional to labor$hours, then more effective use of labor$hours
has the indirect effect of reducing variable overhead. 0ecause +,,,,
fewer labor$hours were required than indicated by the labor standards,
the indirect effect was presumably to reduce variable overhead spending
by about PV=,,,, 5PV+.=, per hour C +,,,, hours7.
%ixed overhead
Bud*et (ariance) "his variance is simply the difference between the
budgeted fixed cost and the actual fixed cost. In this case, the variance
is favorable which indicates that actual fixed costs were lower than
anticipated in the budget.
Volume (ariance) "his variance occurs as a result of actual activity being
different from the denominator activity in the predetermined overhead
rate. In this case, the variance is unfavorable, so actual activity was less
than the denominator activity. It is difficult to place much of a meaningful
economic interpretation on this variance. It tends to be large, so it often
swamps the other, more meaningful variances if they are simply netted
against each other.
olutions !anual, Appendix --A D+
Pro&lem 11'-11 5:= minutes7
-.
><,,,,,,
"otal rate1 3 >-, per L?)
<,,,,, L?)s
>-+,,,,,
2ariable rate1 3 >+ per L?)
<,,,,, L?)s
>:E,,,,,
%ixed rate1 3 >E per L?)
<,,,,, L?)s
+. Lirect materials1 . pounds at >A per pound............ >+-
Lirect labor1 -.= L?)s at >-+ per L?)................... -E
2ariable overhead1 -.= L?)s at >+ per L?)........... .
%ixed overhead1 -.= L?)s at >E per L?)............... -+
tandard cost per unit............................................. >=:
.. a. :+,,,, units C -.= L?)s per unit 3 <.,,,, standard L?)s.
b. !anufacturing &verhead
Actual costs <,<,=,, Applied costs <.,,,,, J
&verapplied overhead +.,=,,
J<.,,,, standard L?)s C >-, per L?) 3 ><.,,,,,.
:. 2ariable overhead variances1
Actual )ours of
Input, at the
Actual 4ate
the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
>-+.,=,, <=,,,, L?)s C
>+ per L?)
<.,,,, L?)s C
>+ per L?)
3 >-.,,,,, 3 >-+<,,,,

4ate 2ariance,
><,=,, %
>:,,,, U
D. !anagerial Accounting, -.th /dition
Pro&lem 11'-11 5continued7
5>-+.,=,,7 6 5<=,,,, L?)s C >+ per L?)7 3 ><,=,, %
>+ per L?) 5<=,,,, L?)s 6 <.,,,, L?)s7 3 >:,,,, U
Actual %ixed
&verhead
0udgeted %ixed
&verhead
%ixed &verhead
Applied to Mork in Process
>:E.,,,, >:E,,,,,J <.,,,, L?)s C >E per L?)
3 >=,:,,,,

0udget 2ariance,
>.,,,, U
2olume 2ariance,
>+:,,,, %
J*an be expressed as1 <,,,,, denominator L?)s C >E per L?) 3
>:E,,,,,
0udget variance1
3 $
3 >:E.,,,, $ >:E,,,,,
3 >.,,,, U
2olume variance1


2olume Lenominator
2ariance hours
3 >E per L?) 5<,,,,, L?)s $ <.,,,, L?)s7
3 >+:,,,, %
olutions !anual, Appendix --A D:
"he companyOs overhead variances can be summari#ed as follows1
2ariable overhead1
4ate variance................................... > <,=,, %
/fficiency variance........................... :,,,, U
%ixed overhead1
0udget variance............................... .,,,, U
2olume variance.............................. +:,,,, %
&verapplied overheadHsee part ...... >+.,=,, %
=. &nly the volume variance would have changed. It would have been
unfavorable because the standard L?)s allowed for the yearOs
production 5<.,,,, L?)s7 would have been less than the denominator
L?)s 5<=,,,, L?)s7.
D= !anagerial Accounting, -.th /dition
Pro&lem 11'-12 5:= minutes7
-. and +. Per 'irect Labor+,our
Variable -i.ed %otal
Lenominator of .,,,,, L?)s1
>-.=,,,, B .,,,,, L?)s................... >:.=, > :.=,
>+A,,,,, B .,,,,, L?)s................... >D.,, D.,,
"otal predetermined rate...................... >-..=,
Lenominator of :,,,,, L?)s1
>-E,,,,, B :,,,,, L?)s................... >:.=, > :.=,
>+A,,,,, B :,,,,, L?)s................... ><.A= <.A=
"otal predetermined rate...................... >--.+=
..
'enominator /cti(ity)
!01000 'L,s
'enominator /cti(ity)
"01000 'L,s
Lirect materials, : feet C
>E.A= per foot................ >.=.,, ame............................. >.=.,,
Lirect labor, + L?)s C
>-= per L?).................. .,.,, ame............................. .,.,,
2ariable overhead, +
L?)s C >:.=, per L?).. D.,, ame............................. D.,,
%ixed overhead, + L?)s
C >D.,, per L?)............ -E.,,
%ixed overhead, + L?)s
C ><.A= per L?)......... -..=,
tandard cost per unit...... >D+.,, tandard cost per unit.... >EA.=,
:. a. -E,,,, units C + L?)s per unit 3 .<,,,, standard L?)s.
b. !anufacturing &verhead
Actual costs ::<,:,, Applied costs :E<,,,, J
&verapplied overhead .D,<,,
J.<,,,, standard L?)s C >-..=, predetermined rate per L?) 3
>:E<,,,,.
olutions !anual, Appendix --A D<
c. 2ariable overhead variances1
Actual L?)s of
Input, at the
Actual 4ate
Actual L?)s of
Input, at the
tandard 4ate
tandard L?)s
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
>-A:,E,, .E,,,, L?)s C
>:.=, per L?)
.<,,,, L?)s C
>:.=, per L?)
3 >-A-,,,, 3 >-<+,,,,

4ate 2ariance,
>.,E,, U
>D,,,, U
5>-A:,E,,7 6 5.E,,,, L?)s C >:.=, per L?)7 3 >.,E,, U
>:.=, per L?) 5.E,,,, L?)s 6 .<,,,, L?)s7 3 >D,,,, U
Actual %ixed
&verhead
0udgeted %ixed
&verhead
Mork in Process
>+A-,<,, >+A,,,,,J .<,,,, L?)s C >D per L?)
3 >.+:,,,,

0udget 2ariance,
>-,<,, U
2olume 2ariance,
>=:,,,, %
J*an be expressed as1 .,,,,, denominator L?)s C >D per L?) 3
>+A,,,,,.
DA !anagerial Accounting, -.th /dition
0udget variance1
3 $
3 >+A-,<,, $ >+A,,,,,
3 >-,<,, U
2olume variance1


2olume Lenominator
2ariance hours
3 >D.,, per L?) 5.,,,,, L?)s $ .<,,,, L?)s7
3 >=:,,,, %
ummary of variances1
2ariable overhead rate variance.................. > .,E,, U
2ariable overhead efficiency variance......... D,,,, U
%ixed overhead budget variance................. -,<,, U
%ixed overhead volume variance................ =:,,,, %
&verapplied overhead................................. >.D,<,, %
olutions !anual, Appendix --A DE
=. "he maGor disadvantage of using normal activity is the large volume
variance that ordinarily results. "his occurs because the denominator
activity used to compute the predetermined overhead rate is different
from the activity level that is anticipated for the period. In the case at
hand, the company has used a long$run normal activity figure of .,,,,,
L?)s to compute the predetermined overhead rate, whereas activity for
the period was expected to be :,,,,, L?)s. "his has resulted in a large
favorable volume variance that may be difficult for management to
interpret. In addition, the large favorable volume variance in this case
has masked the fact that the company did not achieve the budgeted
level of activity for the period. "he company had planned to work :,,,,,
L?)s, but managed to work only .<,,,, L?)s 5at standard7. "his
unfavorable result is concealed due to using a denominator figure that is
out of step with current activity.
&n the other hand, using long$run normal activity as the denominator
results in unit costs that are stable from year to year. "hus,
managementOs decisions are not clouded by unit costs that Gump up and
down as the activity level rises and falls.
DD !anagerial Accounting, -.th /dition
'ppendi% 11+
,ournal $ntries to )ecord -ariances
$%ercise 11+-1 5+, minutes7
-. "he general ledger entry to record the purchase of materials for the
month is1
4aw !aterials
5-+,,,, meters at >..+= per meter7..................... .D,,,,
!aterials Price 2ariance
5-+,,,, meters at >,.-, per meter %7........ -,+,,
Accounts Payable
5-+,,,, meters at >..-= per meter7............ .A,E,,
+. "he general ledger entry to record the use of materials for the month is1
Mork in Process
5-,,,,, meters at >..+= per meter7..................... .+,=,,
!aterials Iuantity 2ariance
5=,, meters at >..+= per meter U7...................... -,<+=
4aw !aterials
5-,,=,, meters at >..+= per meter7............ .:,-+=
.. "he general ledger entry to record the incurrence of direct labor cost for
the month is1
Mork in Process 5+,,,, hours at >-+.,, per hour7 +:,,,,
?abor 4ate 2ariance
5-,DA= hours at >,.+, per hour U7....................... .D=
?abor /fficiency 2ariance
5+= hours at >-+.,, per hour %7................. .,,
Mages Payable
5-,DA= hours at >-+.+, per hour7................ +:,,D=
olutions !anual, Appendix --0 -,,
$%ercise 11+-2 5:= minutes7
-. a.
Actual Iuantity
of Input, at
Actual Price
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
Allowed for &utput,
at tandard Price
-,,,,, yards C
>-..E, per yard
-,,,,, yards C
>-:.,, per yard
A,=,, yardsJ C
>-:.,, per yard
3 >-.E,,,, 3 >-:,,,,, 3 >-,=,,,,

Price 2ariance,
>+,,,, %
E,,,, yards C >-:.,, per yard
3 >--+,,,,
Iuantity 2ariance,
>A,,,, U
J.,,,, units C +.= yards per unit 3 A,=,, yards
-,,,,, yards 5>-..E, per yard 6 >-:.,, per yard7 3 >+,,,, %
>-:.,, per yard 5E,,,, yards 6 A,=,, yards7 3 >A,,,, U
-,- !anagerial Accounting, -.th /dition
$%ercise 11+-2 5continued7
b. "he Gournal entries would be1
4aw !aterials
5-,,,,, yards C -:.,, per yard7.................... -:,,,,,
5-,,,,, yards C >,.+, per yard %7........ +,,,,
Accounts Payable
5-,,,,, yards C >-..E, per yard7......... -.E,,,,
Mork in Process
5A,=,, yards C >-:.,, per yard7.................... -,=,,,,
5=,, yards U C >-:.,, per yard7.................... A,,,,
4aw !aterials
5E,,,, yards C >-:.,, per yard7........... --+,,,,
+. a.
Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
=,,,, hours C
>E.,, per hour
:,E,, hoursJ C
>E.,, per hour
>:.,,,, 3 >:,,,,, 3 >.E,:,,

4ate 2ariance,
>.,,,, U
>-,<,, U
"otal 2ariance,
>:,<,, U
J.,,,, units C -.< hours per unit 3 :,E,, hours
olutions !anual, Appendix --0 -,+
$%ercise 11+-2 5continued7
Alternative olution1
=,,,, hours 5>E.<, per hourJ 6 >E.,, per hour7 3 >.,,,, U
J>:.,,,, B =,,,, hours 3 >E.<, per hour
>E.,, per hour 5=,,,, hours 6 :,E,, hours7 3 >-,<,, U
b. "he Gournal entry would be1
Mork in Process
5:,E,, hours C >E.,, per hour7........................ .E,:,,
?abor 4ate 2ariance
5=,,,, hours C >,.<, per hour U7..................... .,,,,
5+,, hours U C >E.,, per hour7........................ -,<,,
Mages Payable
5=,,,, hours C >E.<, per hour7............... :.,,,,
.. "he entries are1 entry 5a7, purchase of materialsF entry 5b7, issue of
materials to productionF and entry 5c7, incurrence of direct labor cost.
4aw !aterials Mork in Process
5a7 -:,,,,, 5b7 --+,,,, 5b7 -,=,,,,
0al.J +E,,,, 5c7 .E,:,,
Accounts Payable Mages Payable
5a7 -.E,,,, 5c7 :.,,,,
!aterials Price 2ariance !aterials Iuantity 2ariance
5a7 +,,,, 5b7 A,,,,
?abor 4ate 2ariance ?abor /fficiency 2ariance
5c7 .,,,, 5c7 -,<,,
J+,,,, yards of material at a standard cost of >-:.,, per yard
-,. !anagerial Accounting, -.th /dition
Pro&lem 11+-3 5<, minutes7
-. a.
Actual Iuantity of
Actual Iuantity
of Input, at
tandard Price
tandard Iuantity
tandard Price
.+,,,, feet C
>:.E, per foot
.+,,,, feet C
>=.,, per foot
+D,<,, feetJ C
>=.,, per foot
3 >-=.,<,, 3 >-<,,,,, 3 >-:E,,,,

Price 2ariance,
><,:,, %
Iuantity 2ariance,
>-+,,,, U
"otal 2ariance,
>=,<,, U
JE,,,, footballs C ..A ft. per football 3 +D,<,, feet
.+,,,, feet 5>:.E, per foot 6 >=.,, per foot7 3 ><,:,, %
>=.,, per foot 5.+,,,, feet 6 +D,<,, feet7 3 >-+,,,, U
b. 4aw !aterials 5.+,,,, feet C >=.,, per foot7. . -<,,,,,
5.+,,,, feet C >,.+, per foot %7........... <,:,,
Accounts Payable
5.+,,,, feet C >:.E, per foot7.............. -=.,<,,
Mork in Process
5+D,<,, feet C >=.,, per foot7....................... -:E,,,,
5+,:,, feet U C >=.,, per foot7...................... -+,,,,
4aw !aterials
5.+,,,, feet C >=.,, per foot7.............. -<,,,,,
olutions !anual, Appendix --0 -,:
Pro&lem 11+-3 5continued7
+. a.
Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
<,:,, hoursJ C
>E.,, per hour
<,:,, hours C
>A.=, per hour
A,+,, hoursJJ C
>A.=, per hour
3 >=-,+,, 3 >:E,,,, 3 >=:,,,,

4ate 2ariance,
>.,+,, U
><,,,, %
"otal 2ariance,
>+,E,, %
J E,,,, footballs C ,.E hours per football 3 <,:,, hours
JJ E,,,, footballs C ,.D hours per football 3 A,+,, hours
<,:,, hours 5>E.,, per hour 6 >A.=, per hour7 3 >.,+,, U
>A.=, per hour 5<,:,, hours 6 A,+,, hours7 3 ><,,,, %
b. Mork in Process 5A,+,, hours C >A.=, per hour7. =:,,,,
?abor 4ate 2ariance
5<,:,, hours C >,.=, per hour U7...................... .,+,,
5E,, hours % C >A.=, per hour7 ............... <,,,,
Mages Payable
5<,:,, hours C >E.,, per hour7................ =-,+,,
-,= !anagerial Accounting, -.th /dition
.. Actual )ours of
Input, at the
Actual 4ate
Actual )ours of
Input, at the
tandard 4ate
tandard )ours
Allowed for &utput,
at the tandard 4ate
5A) C A47 5A) C 47 5) C 47
<,:,, hours C
>+.A= per hour
<,:,, hours C
>+.=, per hour
A,+,, hours C
>+.=, per hour
3 >-A,<,, 3 >-<,,,, 3 >-E,,,,

4ate 2ariance,
>-,<,, U
>+,,,, %
"otal 2ariance,
>:,, %
<,:,, hours 5>+.A= per hour 6 >+.=, per hour7 3 >-,<,, U
>+.=, per hour 5<,:,, hours 6 A,+,, hours7 3 >+,,,, %
:. @o. )e is not correct in his statement. "he company has a large,
unfavorable materials quantity variance that should be investigated.
Also, the overhead rate variance equals -,; of standard, which should
also be investigated.
It appears that the companyOs strategy to increase output by giving
raises was effective. Although the raises resulted in an unfavorable rate
variance, this variance was more than offset by a large, favorable
efficiency variance.
olutions !anual, Appendix --0 -,<
=. "he variances have many possible causes. ome of the more likely
causes include the following1
Materials (ariances)
%avorable price variance1 (ood price, inferior quality materials, unusual
discount due to quantity purchased, drop in market price, less costly
method of freight, outdated or inaccurate standards.
Unfavorable quantity variance1 *arelessness, poorly adGusted machines,
unskilled workers, inferior quality materials, outdated or inaccurate
standards.
Labor (ariances)
Unfavorable rate variance1 Use of highly skilled workers, change in pay
scale, overtime, outdated or inaccurate standards.
%avorable efficiency variance1 Use of highly skilled workers, high$quality
materials, new equipment, outdated or inaccurate standards.
Variable o(erhead (ariances)
Unfavorable rate variance1 Increase in costs, waste, theft, spillage,
purchases in uneconomical lots, outdated or inaccurate standards.
%avorable efficiency variance1 ame as for labor efficiency variance.
-,A !anagerial Accounting, -.th /dition
Pro&lem 11+-4 5A= minutes7
-. a. 0efore the variances can be computed, we must first compute the
standard and actual quantities of material per hockey stick. "he
computations are1
Lirect materials added to work in process 5a7. . >--=,+,,
tandard direct materials cost per foot 5b7........ >..,,
tandard quantity of direct materials 5a7 B 5b7. . .E,:,, feet
tandard quantity of direct materials 5a7........... .E,:,, feet
@umber of sticks produced 5b7.......................... E,,,,
tandard quantity per stick 5a7 B 5b7................. :.E feet
Actual quantity of direct materials used per stick last year1
:.E feet K ,.+ feet 3 =., feet.
Mith these figures, the variances can be computed as follows1
Actual Iuantity
of Input, at
Actual Price
Actual Iuantity of
Input, at tandard Price
tandard Iuantity
tandard Price
<,,,,, feet C
>..,, per foot
.E,:,, feet C
>..,, per foot
>-A:,,,, 3 >-E,,,,, 3 >--=,+,,

Price 2ariance,
><,,,, %
:,,,,, feetJ C >..,, per foot
3 >-+,,,,,
Iuantity 2ariance,
>:,E,, U
JE,,,, units C =., feet per unit 3 :,,,,, feet
olutions !anual, Appendix --0 -,E
<,,,,, feet 5>+.D, per footJ 6 >..,, per foot7 3 ><,,,, %
J>-A:,,,, B <,,,,, feet 3 >+.D, per foot
>..,, per foot 5:,,,,, feet 6 .E,:,, feet7 3 >:,E,, U
b. 4aw !aterials 5<,,,,, feet C >..,, per foot7....... -E,,,,,
5<,,,,, feet C >,.-, per foot %7................... <,,,,
Accounts Payable
5<,,,,, feet C >+.D, per foot7...................... -A:,,,,
Mork in Process 5.E,:,, feet C >..,, per foot7. . . --=,+,,
5-,<,, feet U C >..,, per foot7.......................... :,E,,
4aw !aterials 5:,,,,, feet C >..,, per foot7. -+,,,,,
-,D !anagerial Accounting, -.th /dition
+. a. 0efore the variances can be computed, we must first determine the
actual direct labor hours worked for last year. "his can be done
through the variable overhead efficiency variance, as follows1
>-.., per hour C 5A) 6 -<,,,, hoursJ7 3 ><=, U
>-.., per hour C A) 6 >+,,E,, 3 ><=,JJ
>-.., per hour C A) 3 >+-,:=,
A) 3 >+-,:=, B >-.., per hour
A) 3 -<,=,, hours
J E,,,, units C +., hours per unit 3 -<,,,, hours
JJ Mhen used in the formula, an unfavorable variance is positive.
Me must also compute the standard rate per direct labor hour. "he
computation is1
?abor rate variance 3 5A) C A47 6 5A) C 47
>AD,+,, 6 5-<,=,, hours C 47 3 >.,.,, %
>AD,+,, 6 -<,=,, hours C 4 3 6>.,.,,J
-<,=,, hours C 4 3 >E+,=,,
4 3 >E+,=,, B -<,=,, hours
4 3 >=.,, per hour
J Mhen used in the formula, a favorable variance is negative.
olutions !anual, Appendix --0 --,
(iven these figures, the variances are1
Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
-<,=,, hours C
>=.,, per hour
-<,,,, hours C
>=.,, per hour
>AD,+,, 3 >E+,=,, 3 >E,,,,,

4ate 2ariance,
>.,.,, %
>+,=,, U
"otal 2ariance,
>E,, %
-<,=,, hours 5>:.E, per hourJ 6 >=.,, per hour7 3 >.,.,, %
JAD,+,, B -<,=,, hours 3 >:.E, per hour
>=.,, per hour 5-<,=,, hours 6 -<,,,, hours7 3 >+,=,, U
b. Mork in Process
5-<,,,, hours C >=.,, per hour7........................ E,,,,,
5=,, hours U C >=.,, per hour7......................... +,=,,
?abor 4ate 2ariance
5-<,=,, hours C >,.+, per hour %7............... .,.,,
Mages Payable
5-<,=,, hours C >:.E, per hour7.................. AD,+,,
--- !anagerial Accounting, -.th /dition
.. Actual )ours of
Input, at the
Actual 4ate
at the tandard 4ate
tandard )ours
the tandard 4ate
5A) C A47 5A) C 47 5) C 47
-<,=,, hours C
>-.., per hour
-<,,,, hours C
>-.., per hour
>-D,E,, 3 >+-,:=, 3 >+,,E,,

4ate 2ariance,
>-,<=, %
><=, U
"otal 2ariance,
>-,,,, %
-<,=,, hours 5>-.+, per hourJ 6 >-.., per hour7 3 >-,<=, %
J>-D,E,, B -<,=,, hours 3 >-.+, per hour
>-.., per hour 5-<,=,, hours 6 -<,,,, hours7 3 ><=, U
olutions !anual, Appendix --0 --+
:. -or materials)
%avorable price variance1 Lecrease in outside purchase priceF fortunate
buyF inferior quality materialsF unusual discounts due to quantity
purchasedF less costly method of freightF inaccurate standards.
Unfavorable quantity variance1 Inferior quality materialsF carelessnessF
poorly adGusted machinesF unskilled workersF inaccurate standards.
-or labor)
%avorable rate variance1 Unskilled workers 5paid lower rates7F
pieceworkF inaccurate standards.
Unfavorable efficiency variance1 Poorly trained workersF poor quality
materialsF faulty equipmentF work interruptionsF fixed labor and
insufficient demand to fill capacityF inaccurate standards.
-or (ariable o(erhead)
%avorable rate variance1 Lecrease in supplier pricesF less usage of
lubricants or indirect materials than plannedF inaccurate standards.
Unfavorable efficiency variance1 ee comments under direct labor
efficiency variance above.
=.
Standard
Quantity or
,ours
Standard Price
or Rate
Standard
Cost
Lirect materials.............. :.E feet >..,, per foot >-:.:,
Lirect labor.................... +., hours >=.,, per hour -,.,,
2ariable overhead.......... +., hours >-.., per hour +.<,
"otal standard cost......... >+A.,,
--. !anagerial Accounting, -.th /dition

Standard Costs and Operating Performance Measures: Solutions To Questions

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